The Magic of Loss Leaders

Ever wonder how electronics stores on Black Friday make money selling a TV for $50 less than what they paid for it? Here’s a hint: They don’t—not on the TV, anyway.

The TV is actually what’s called a “loss leader”. It’s a product on which retailers are losing money, but using as “bait” to lure in shoppers. It’s a strategy employed by some of the most successful retailers in the world. And it applies to almost any type of business. 

Let’s expand on that TV example...

 

The Scenario

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The shopper sees the ad for a below-wholesale price TV “while supplies last”. So they decide to visit, and hopefully, bring a friend or family member. When they get there, they see there are only around 25 TVs in stock. If they didn’t make it, they can look around at all the other TVs and hopefully decide to settle on a more profitable option with plenty of units in stock.

But let’s assume they made it in time. They have their TV. But wait, they’ll need to mount it. Conveniently, the store also sells TV mounts at full price. Oh, and they’re next door to the blu-ray players & set-top boxes with nice hanging displays of HDMI cables throughout the aisle.

They should also see a display for a nice audio-boosting sound bar right by the checkout counter. They’ve got the TV, they’ve got the cables and the blu-ray player in the cart already. They might as well! 

Lastly, once they get to the counter, they can pay for an extra, limited 90-day warranty on their purchase. Warranties are very rarely used and usually, the cost of re-stocking is more than covered by the warranty fee if it comes to that. 

Each of those accessories is a money-maker and more than makes up for the $50 lost selling the TV. 

 

Year-Round Success

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Loss leaders are not just reserved for electronics on Black Friday. For example, every summer both 7-Eleven and McDonald's offer large sodas at a loss. A customer can walk into a 7-Eleven and walk out with a Big Gulp drink for only 79¢. 

Thing is, no one usually walks out of 7-Eleven with just a drink. They grab a snack, a tank of gas, a panicked last-minute gift on the way to a child’s birthday party. You know, the usual. At McDonald's, you could just get a drink… but it’s hard to say no to some fries while you’re there. 

At Olive Garden, "all-you-can-eat soup, salad, and breadsticks" is a great sales pitch. Those are also very high-margin products. Soup and breadsticks are also especially filling. So it’s easy to end up paying $15 for $3 worth of food purely because, “I could have eaten more if I wanted to.” 

 

Trust the Numbers

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Now every business will have savvy customers who know the ropes and take advantage. It can be hard to watch a waiter deliver that 5th helping of soup, salad, and breadsticks to the same table of teens if you own the restaurant, but what actually matters is the bottom line. This is where the law of averages kicks in. 

The average person is not going to walk into the electronics store we started with and buy only the TV and nothing else. There may be a few, but by and large, the system works because most people are willing to pay the premium on the rest if they know they’re getting a great deal on the TV. Most diners don’t mind paying a high price for the food if they know for certain they won’t be leaving hungry. 

For smaller businesses, it’s best to start small. Pick one popular item, just one. Ideally, it should be an item that pairs naturally with others. Wine and cheese, t-shirt and jeans, phones and cases, etc. Take a hit on one and see if that boosts sales on the others. Odds are it will, but if it doesn’t, you can extrapolate and learn. Discounting one may not do the trick, but it could be that discounting the other will. 

 

Conclusion

At the end of the day, the goal is to make money, overall. This is where most business owners fail to see the bigger picture and hit the panic button. They see a loss on one transaction and thus conclude the system must be failing.

There will be some losses if you pursue this. Customers will take you up on it if you offer a deal, and sometimes that means they take you up on only that deal. So make sure you communicate the strategy to partners and managers.

The key is to keep a very close eye on your reports and use the data to guide you. You may find a strategy that baffles your competitors and boosts your bottom line. 

Getting accurate insights on profits and losses is almost impossible without some kind of software helping you out. Otherwise, you may find yourself manually updating spreadsheets for half your workday. Tools like Shopventory can provide that insight for you and deliver your bottom line; perfectly calculated, every time. 

Right now, Shopventory is offering a 30-day full-featured free trial of our inventory optimization tools with no credit card required. We also back Shopventory with a 30-day money back guarantee. That means a total of 60 days risk-free!

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